Olfa Hamdi is the co-founder of Concord® Project Technologies and the founding executive director of the Institute for Advanced Work Packaging. She was a member of the CII research team that produced IR-272, and is now leading the movement for predictable, integrated, technology-driven capital projects management. Her first book, Advanced Work Packaging: Guide for Life Cycle Implementation is out this month.
Nobody who works on capital projects was surprised by a Bloomberg report that revealed Exxon overspent by $138 Billion
A recent scoop by Bloomberg’s U.S. oil reporter, Kevin Crowley, revealed that Exxon and its partners overspent by $138 Billion over 20 years. The news story was based on an internal Exxon report that looked at 110 projects between 1998 and 2017. It found that 21 of the projects accounted for 93% of the overspend, the worst of them costing more than six times early estimates.
The Exxon spokesman directed his response to investors, explaining that the $138 Billion included partners’ stakes, and that the company itself shouldered a fraction of the cost overruns, a mere $20 Billion. Of that, just $6 Billion was attributable to projects that Exxon actually operated.
This may satisfy investors, but for those of us in the industry it’s an unhelpful diversion. We have long known that most capital projects are woefully late and over budget. In a 2016 analysis, McKinsey reported that large projects across all asset classes typically take 20 percent longer to finish than scheduled, and are up to 80 percent over budget. Exxon is just the latest in a long line of companies who have been forced to publicly admit the capital project construction industry’s dirty little secret: we rarely deliver on-time and on-budget, and this failure costs investors, partners and taxpayers billions of dollars.
We rarely deliver on-time and on-budget, and this failure costs investors, partners and taxpayers billions of dollars.
There are better ways to deliver capital projects. I’ve spent more than a decade studying, implementing and promoting the benefits of effective project delivery systems like Advanced Work Packaging and Predictability Thinking™. The sad reality is that the industry as a whole remains slavishly devoted to project delivery systems developed in the 1960s and 70s — before the advent of computers — despite decades of evidence showing that these systems alone are not capable of delivering projects on-time and on-budget. These critical systems rarely make the C-suite agenda, and when they do, executives often conclude that systemic change is not necessary, and that they need only tighten the harness and crack the whip to regain efficiency.
I disagree, and here’s why.
1. Poor Planning is Built Into the System
“In one instance, it was decided to shorten the length of a pipeline to cut costs. But that ended up rerouting the pipeline through a ‘more challenging and sensitive location.’ Costs were ultimately higher than they would have been otherwise.”
– Bloomberg
Traditional project delivery systems permit and even encourage inadequate planning, so this type of failure is common on modern capital projects. The report does not indicate why the new route was “more challenging and sensitive,” but surely these challenges and sensitivities would have been identified with proper front-end definition and a genuine understanding of site conditions. I would even hazard to say that the original, longer pipeline was probably designed to circumvent these “challenges and sensitivities,” and that the original plan was either abandoned or overridden in the pursuit of speed and profit.
Sir Wintson Churchill said: “He who fails to plan is planning to fail.” So long as we continue to authorize projects before they are fully defined, we will continue to see failures like this one.
2. Engineering Continues to Drive Capital Projects
“Shortcuts were taken in engineering to save costs and resulted in poor quality and excessive cost in fabrication and construction.”
– Bloomberg
This type of failure will be familiar to many capital project professionals because most capital projects are still organized around engineering. An engineering-driven process is usually adopted by default, not by design; capital projects begin with engineering, and so engineering teams end up dictating the terms of execution. Unfortunately, this default approach has a significant impact on capital project predictability: According to CII, nearly two-thirds of all field rework can be traced back to engineering errors.
Advanced Work Packaging and Predictability Thinking® offer a construction-driven approach to capital project planning designed to address this very issue. On a construction-driven project, planning and engineering are overseen by construction, and organized to support the construction strategy and sequence. Engineers, schedulers, procurement teams and everyone else involved in the project works to meet the well-defined requirements of the construction team.
For most established capital project organizations, moving to a construction-driven mindset is a significant paradigm shift. While challenging, the reward is a more predictable project.
3. Leaders Are In Denial
“The analysis … suggested that planners have ‘intentionally underestimated’ the price tags of projects in critical early stages to get them green-lit. ‘This theory suggests human biases and behavior contribute to overoptimistic outlooks,’ the study said. … ‘Shortcuts can create false expectations and set a project up for failure.’”
– Bloomberg
A project delivery system that tolerates intentional underestimates, permits shortcuts, fails to account for optimism bias and allows leaders to create false expectations is a broken project delivery system.
There are many signs that the system is broken. We don’t respect the stage gates, or we put so much distance between them that they become meaningless, and the project is allowed to lurch forward without real oversight. We kowtow to the markets, which measure the success of 10-year projects based on their quarterly performance, and thereby create conflicting incentives for project leaders. Broken project delivery systems need fixing, and Owner and EPC companies should take the lead in fixing them.
The answer to this is Predictability Thinking®. Leaders must take responsibility for their project delivery systems, benchmark them against best practices, identify and quantify the risks associated with weak or immature project delivery systems, and incorporate those risks into Stage 1 and Stage 2 estimates. Those who oversee the project delivery system cannot be penalized by the C-suite for highlighting problems; indeed, they must be incentivized to tell the truth and be rewarded for remaining risk-averse.
When it comes to project delivery systems, there are no easy answers, and each company must tailor its own solution to the challenge of delivering capital projects on-time and on-budget.
A project delivery system that tolerates underestimates, permits shortcuts, fails to account for optimism bias and allows leaders to create false expectations is a broken project delivery system.
Your project delivery system will not evolve the same way your business objectives evolve. Capital projects are about people, and their capacity to do the work required to deliver on-time and on-budget.
Today, we have a significant competency gap in terms of project managers, project directors, engineering leads, procurement managers, construction managers with the ability to address the challenges faced by Exxon and other major capital project companies. If you’re ready to take the next step in learning how to build a sustainable, construction-driven project delivery system, contact us today.
Olfa Hamdi
CEO, Concord® Project Technologies
